In the wake of the economic recession, public pension plans have emerged as an increasingly salient and contested public policy issue. The debate over public pensions is driven in large part by the fact that many public retirement systems are significantly under-funded.

For example, numerous estimates peg the national shortfall in public pension assets relative to liabilities at several trillion dollars.



1) Figure 1 displays state pension funding levels for the 2010 fiscal year, when 34 states had less than 80 percent of their pension liabilities funded.



2) Given the pervasiveness of funding shortfalls, there have been proposals to shift public-sector pensions from defined benefit (DB) plans towards defined contribution (DC) plans which are, by definition, fully-funded.



3,4) However, this approach is not without controversy, as it shifts the future risk associated with investment returns earned on pension assets away from taxpayers and towards employees and raises questions about employee preferences for different types of pension plans and how reform might affect retirement security and workforce composition.

In addition, moving towards a DC-type pension system does nothing, by itself, to address existing shortfalls.